ACA MAGI: Living off of dividends vs LTCG

[ziggy29]

So in practical terms - if one has a majority of their after-tax investments in Wellington and wants to minimize the unpredictable (and uncontrollable) effect of CG Distributions, what would be an equivalent but much more tax efficient Vanguard fund to convert to?

Almost anything that is indexed will have very low capital gains. And some ETFs manage to produce almost no taxable income, year after year.

One of the closer matches to Wellington I can find is VSMGX (Life Strategy Moderate Growth), which is a "fund of index funds" that maintains a 60/40 AA and a 0.13% ER. It does generate some capital gains (in part to maintain an appropriate AA), but far less than most managed funds, including Wellington. If you wanted something a little closer to Wellington, like 65/35, you could keep about 85% into this fund and 15% into an equity index fund like an S&P or total market index -- or use a 50/50 index and add some total market index into it.

Of course, making that change may include substantial LTCG if your current position in Wellington is significantly appreciated, unless you can find some other way to reduce your MAGI that year. And if you wanted to maintain a specific asset allocation you'd have to occasionally rebalance which will also trigger some LTCG.

 

[RunningBum]

So in practical terms - if one has a majority of their after-tax investments in Wellington and wants to minimize the unpredictable (and uncontrollable) effect of CG Distributions, what would be an equivalent but much more tax efficient Vanguard fund to convert to?

Vanguard Balanced Index (VBIAX) is 50/50, so add some VG Total Stock Index (VTSAX) to get the same stock/bond mix as Wellington.

If you really like Wellington you can move it to an IRA, where the distributions won't affect your MAGI.

 

[sengsational]

OP could sell any higher dividend tickers in his taxable account and buy lower dividend tickers to reduce dividends to get income under ACA limit and then do the inverse in his tax-deferred account... sell lower dividend tickers and replace with higher dividend tickers.

OP could potentially have the same overall portfolio composition but just reconfigured to reduce taxable account income to achieve ACA subsidies. Gains from taxable account sales will likely make him ineligible in the year of configuration but he should be ok in subsequent years.

This is the thought I had when I read the OP. It has the awesome benefit of avoiding something which apparently manifests as the "third rail" between some members.


The strategy mentioned above also has the benefit of being immune to whether the market is frothy or in the dumps...you're selling to yourself in order to cross the tIRA / taxable boundary, so it doesn't affect your allocation.

 

[Looking4Ward]

Vanguard Balanced Index (VBIAX) is 50/50, so add some VG Total Stock Index (VTSAX) to get the same stock/bond mix as Wellington.

If you really like Wellington you can move it to an IRA, where the distributions won't affect your MAGI.

After close to 6 years of ER, I find myself in the situation where roughly half my portfolio is after-tax and comprised primarily of Wellington, and the other half in tIRA where again it's mostly Wellington.

I made the mistake (to me) of focusing on dividends and CG distributions in the first couple of years of ER and not on total return. While they were almost enough on their own from my after tax account to cover expenses, that is no longer the case and now they are threatening my ACA subsidies.

On the flip side, I'm considering purchasing a home in three years and will attempt to secure a mortgage with 30-40% down. The dividend and CGD's help qualifying because they show up on tax returns and I will also start to convert $60-$100K of my tIRA to a Roth and those distributions will also add as income to help qualify for a mortgage.

So I know that I will totally lose ACA subsidies for a couple of years while I do that. And the more I think about it the more it becomes clear ACA may complicate things more than it's worth.

5 years to Medicare and it won't be an issue for me anymore.

 

[homestead]

So in practical terms - if one has a majority of their after-tax investments in Wellington and wants to minimize the unpredictable (and uncontrollable) effect of CG Distributions, what would be an equivalent but much more tax efficient Vanguard fund to convert to?

Look at Vanguard Tax-Managed Balanced Adm VTMFX, no capital gains were paid last year.

 

[RunningBum]

After close to 6 years of ER, I find myself in the situation where roughly half my portfolio is after-tax and comprised primarily of Wellington, and the other half in tIRA where again it's mostly Wellington.

I made the mistake (to me) of focusing on dividends and CG distributions in the first couple of years of ER and not on total return. While they were almost enough on their own from my after tax account to cover expenses, that is no longer the case and now they are threatening my ACA subsidies.

On the flip side, I'm considering purchasing a home in three years and will attempt to secure a mortgage with 30-40% down. The dividend and CGD's help qualifying because they show up on tax returns and I will also start to convert $60-$100K of my tIRA to a Roth and those distributions will also add as income to help qualify for a mortgage.

One further idea I have is that lowering your dividends and CG distributions would give you more room to convert to a Roth while showing the income for your loan. You could possibly get ACA subsidies some years, qualify for a mortgage, and get more money into the tax free Roth account. Three time winner. The loss would be the CG tax on selling Wellington now. The biggest factor is whether you want to stay with Wellington long term, or if other alternatives are just as good for you.

So I know that I will totally lose ACA subsidies for a couple of years while I do that. And the more I think about it the more it becomes clear ACA may complicate things more than it's worth.

5 years to Medicare and it won't be an issue for me anymore.

And that's perfectly fine. You've got the data to consider your options, and if you decide to stick with Wellington, that's your business. Showing the options was all I was trying to do in this thread, not the other things I was unfairly accused of doing, by people who seemed to think there were no options.

 

[ziggy29]

So I know that I will totally lose ACA subsidies for a couple of years while I do that. And the more I think about it the more it becomes clear ACA may complicate things more than it's worth.

Got it. Obviously there is more to financial planning than just ACA subsidies and such, but depending on circumstances (and tax rates) it may be advantageous to make a bunch of moves that generate ACA MAGI into one year so the subsidy is only lost for one year. Of course, it also depends on what it does to your marginal tax rates and whether the additional taxes would be considerably more than the subsidies you are receiving. If it kicks too much income into a higher bracket then, as you said, maybe do it over two years.

Look at Vanguard Tax-Managed Balanced Adm VTMFX, no capital gains were paid last year.

Good fund for the right situation. When my mom was alive I had her taxable Vanguard account heavily invested in this. Just remember that it generates tax-exempt (muni bond) income which is included in MAGI. (Not as much as a taxable bond fund, of course, since there is less interest income all else being equal.) And as it is roughly a 50/50 AA, half the fund holdings generate said bond interest.

 

[joedil]

My wife and I were in a similar situation a few years back -- our income(MAGI) was about 80K and we needed to get it to a little over 62K to qualify for a ACA deduction -- We ended up qualifying for two years by using the various front page deductions available to reduce our MAGI -- as it turns out we ended up with a MAGI of about 59K and saved a couple of grand thanks to the ACA credit. The deductions we used were HSA's for each of us (maxed out to the then contribution limit) a Deductible IRA (that was about 6K) (that was the first time I contributed to my regular IRA and not a ROTH since the Roth's came on the scene in the mid 90's -- but it was a 6K deduction...I think the Self-employed tax (i was working as a consultant part time) also kicked in...bottom line was I came up with about 23 K in deductions that dropped my MAGI from about 82 to 59K....if you are close, it is definitely worth looking into...and it took some studying of the tax code but it was worth it...

 

[meleana]

Our FA has us living off cash this year and maybe doing small Roth conversions (at 10% tax rate)- but to keep us $30,000 and under so I would get full subsidies and even subsidized cost sharing with the ACA. Not sure how this is going to work. This is our first year without a paycheck. Husband retired and is on Medicare and I am retired but not Medicare eligible yet. Right now paying $545 per month for retiree medical insurance- a POS policy. ACA for a silver plan for me would be $103 per month- an EPO policy.